This installment in Holmes PLLC’s emerging topics continues a survey of how business people can inadvertently become partners with one another, by operation of common law and statutory law. As in the movie “The Founder” – about Ray Kroc and other businesspeople who created McDonald’s as we know it – business people can become partners simply because they behave as though they are in a partnership. The law will deem that they’ve become partners because their collective business activities have the indicia of a partnership.
Beyond the first two factors for partnership formation,
(1) a right to receipt of profits and
(2) an expression of intent to be partners, several other factors determine when the law deems that business people have become partners with each other.
(3) participation or right to participate in control of the business;
(4) agreement to share or sharing:
(A) losses of the business; or
(B) liability for claims by third parties against the business; and
(5) agreement to contribute or contributing money or property to the business.
Today we will address factors (3), (4), and (5). In regards to factor (3), the right of control is one of “the most important factors.” Ingram v. Deere, 288 S.W.3d 886, 896 (Tex. 2009). “The right to control a business is the right to make executive decisions.” Ingram, 288 S.W.3d at 901. Several sub-factors are relevant to concluding that a party has the right to make executive decisions, including: (1) the exercise of authority over the business’s operation; (2) the right to write checks on the business’s checking account; (3) control over and access to the business’s books; and (4) the receipt of and management of all of the business’s assets and monies. Id. As one can clearly see, the inquiry to factor (3) can be a complicated and intricate assessment.
The third factor truly creates a case-by-case analysis – that is why it is so important to hire an attorney to draft the appropriate documents for one’s business. For example, “being sporadically provided information regarding the business does not indicate . . . control of or the right to control the business.” See, e.g., Knowles v. Wright, 288 S.W.3d 136, 147 (Tex. App.—Houston [1st Dist.] 2009, pet. denied) (testimony that parties “made decisions together” did not constitute evidence of control where one party “retained ultimate control over business decisions”); Sewing v. Bowman, 371 S.W.3d 321, 335 (Tex. App.—Houston [1st Dist.] 2012, pet. dism’d) (“Bowman submitted no evidence that he made executive decisions or had the right to make such decisions.”). See also Hoss v. Alardin, 338 S.W.3d 635, 646 (Tex. App.—Dallas 2011, no pet.) (holding no evidence of right of control when plaintiff merely could “direct the [business’s] employees that [defendant] assigned to the . . . project” and defendant “had the ultimate power to decide whether anything was done or not done on the project”).
Like the foregoing factor, factor (4) is also one of the most important and fact-specific factors. Indeed, certain courts have stated that the “most important factors” for informal partnership creation are participation in control over the business and agreement to share profits and losses, factors (3) and (4). Box v. Dallas Mexican Consulate General, Civil Action No. 3:08-cv-1010-O, 2014 WL 1012449 (N.D. Tex. Mar. 14, 2014).
In MetroplexCore, L.L.C. v. Parsons Transportation, Incorporated, the court noted that the statute (Business Organizations Code) provides that an agreement to share losses is not necessary to create a partnership and that simply showing the right to share or sharing in gross returns or revenue is not enough by itself to show a partnership. Tex. Bus. Orgs. Code § 152.052(b)(3), (c). The court stated that the right to share profits and control of the business are generally considered the most important factors in establishing the existence of a partnership. 743 F.3d 964 (5th Cir. 2014).
To satisfy this factor, a party must show that the parties discussed and agreed that losses or liabilities would be shared by the parties in a particular manner. See Ingram, 288 S.W.3d at 902 (finding no evidence of the fourth factor when the trial record “never discussed what would happen to the allocation if expenses exceeded one-third of the revenue or gross income” and “never discussed losses, only expenses”); Shafipour v. Rischon Dev. Corp., No. 11-13- 00212-CV, 2015 WL 3454219, at *7 (Tex. App. — Eastland May 29, 2015, pet. denied) (mem. op.) (reversing judgment based on partnership finding where, among other things, no evidence presented of an agreement to share losses or liabilities).
As discussed already, each factor is not necessary to the creation of a partnership, and Texas courts apply a “totality-of-the-circumstances” test. The party asserting the existence of a partnership bears the burden to prove a partnership was created. With this in mind, we turn to factor (5): an agreement to contribute or contributing money or property to the business. This factor is almost always satisfied when the parties are fighting over an informal partnership. The parties already have begun a business activity – which typically involves each party pitching in some capital (money, property, etc.) to start a business. After this initial injection of capital, the parties fight over the meaning of their relationship, with half the parties claiming that they proceeded as a business partnership, and the other half claiming that they remained arm’s-length at all times. Because factor (5) is so commonly satisfied, courts tend to give it little weight apart from the other factors. See, e.g., Westside Wrecker Serv., Inc. v. Skafi, 361 S.W.3d 153, 172-73 (Tex. App.—Houston [1st Dist.] 2011, pet. denied) (holding that there was no evidence to support partnership finding when the only evidence of a partnership was the contribution of money); Carpenter v. Phelps, 391 S.W.3d 143, 153 (Tex. App.—Houston [1st Dist.] 2011, no pet.) (same).
Holmes PLLC frequently advises business people who, inadvertently and/or sloppily, have fallen into a partnership as part of an ongoing business activity. The firm also helps business people to avoid such inadvertent “partnering” and “partnership formation.” In the firm’s experience, when business people have become partners unwittingly and without advance planning, they do not like the consequences and are looking to Holmes PLLC and its deep legal experience to extricate them from the unwanted partnership.
The firm uses pre-lawsuit negotiations, litigation strategies, and if necessary trial work and appellate work in order to remedy each particular partnership problem. On the front end – and it’s always more cost-effective to prevent problems than to find remedies for them – Holmes PLLC carefully papers its clients’ business transactions in order to deter, minimize or preclude any claim that its clients have inadvertently become partners with persons with whom they do not wish to be partners. When it comes to an unwanted partnership, truly it can be said that an ounce of prevention is worth a pound of cure.